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Sine qua non to get DTAA benefits
November, 04th 2006
The principle of double taxation avoidance is simple, but its interpretation is often tricky

Nobody should suffer taxation on the same income in two countries on the basis of residence in one and accrual in another. That is the principle behind the Double Taxation Avoidance Agreements entered into by India with about 100 countries. The principle is simple. But interpretation of the treaty provisions is usually complex. Several authorities have a say here: The Supreme Court at the apex level, the Authority for Advance Ruling (AAR), and the Income-Tax Appellate Tribunal. Is it open to the ITAT not to follow a decision of the AAR in matters connected with treaty interpretations? This question came up for detailed consideration in Assistant Director of Income-Tax vs. Green Emirate Shipping and Travels 286 ITR (AT) 60 (Mumbai).


A shipping line based in the United Arab Emirates claims that its income was liable to tax only in the UAE and relied on Article 8 of the DTAA with that country. The Assessing Officer sought proof for tax residency for the company in the UAE. He took the view that in order to get the advantage of the DTAA, a person should not only to be a resident of one of the contracting states but should also be liable to tax therein.

There was no evidence to show that the shipping line was taxed in the UAE. Since tax was not actually paid in one of the contracting states, the benefits could not be extended to the shipping line.

The company had produced a Residency Certificate issued by the Ministry of Finance and Industry in the UAE. The argument was that the income should have been liable to tax twice by the existing laws of both the contracting states. The company pleaded that it was liable to tax only in the UAE, its country of domicile. The Assessing Officer rejected this claim as he found that the company was not paying taxes in the UAE. the departmental contention was that a person, apart from being a resident of one of the contracting states, should also be "liable to tax" there. What is the significance of this phrase `liable to tax'? Does it mean liability at present or does it also cover potential liability? Does the Double Taxation Avoidance Agreement take into account even the prospect of future tax liability?

Conflicting views of AAR

There are several Rulings of the AAR on this issue but the ultimate result is still a matter of confusion. The earliest ruling was in Mohsinally Alimohammed Rafik, In Re 213 ITR 317. This was that DIT relief is available irrespective of whether the same income is taxed in the other country or not. The correctness of this view was conceded by the Board in Circular No.734 dated January 24, 1996.

The AAR, however, took a directly opposite view in Cyril Eugene Pereira, In Re 239 ITR 650. The matter was considered by the Supreme Court in the famous Azadi Bachao Andolan case, 263 ITR 706 (SC). The Supreme Court ruled saying it was not persuaded to accept the argument that avoidance of double taxation can arise only when the tax is paid in one of the contracting states.

In spite of these decisions of the Supreme Court, the AAR again considered the matter in its elaborate judgment in Abdul Razack A. Meman In Re276 ITR 306 and concluded that though the payment of tax may not be necessary, at least tax should be payable in the other country.

The AAR considered the Supreme Court's views in Azadi's case and stated that the Pereira case was disapproved by the Supreme Court only to the extent that it recognised payment of tax as a necessary ingredient for DIT relief and that, in other matters, the Pereira case should be followed. The confusion was worse confounded and the controversy was reopened by this decision of the AAR.

The Tribunal decision

The Mumbai Bench of the Income-tax Appellate Tribunal considered all the decisions on the subject and chose not to follow the views expressed by the AAR in the case of Meman In Re (Supra). It relied on the Supreme Court's judgment in the Azadi case. Taxability in one country is not the sine qua non for relief under the treaty from taxability in the other country. All that is needed is that the person should be "liable to tax in the contracting state by reason of domicile, residence, place of management, place of incorporation or any other criterion of similar nature" which essentially refers to the fiscal domicile of such a person.

If the fiscal domicile of a person is in a contracting state, irrespective of whether or not that person is actually liable to pay tax in that country, he is to be treated as resident of that contracting state. The expression "liable to tax" is not to be read in isolation but in conjunction with the words immediately following it, i.e., "by reason of domicile, etc". That would mean that merely living in a contracting state is not sufficient, the person should also have fiscal domicile in that country.

It is time the Government came up with a clear policy statement on the subject.

(The author is a former Chief Commissioner of Income-Tax.)

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